AIB bonuses Workers paying for unethical looting

Ethical egoism has very little to do with the good running of banks, writes Bill Hobbs

At its epoch, in what can only be described as immoral and unethical looting, boom time Ireland’s senior bank managers were paying themselves obscene salaries.

Looting occurs when managers manipulate organisational resources for short term gain at the expense of their company’s long term sustainability. In terms of ethical frameworks, looters adopt a minimalist ethical position called ethical egoism, where their self-interest regards the interests of employers and shareholders as paramount.

This is seen in arguments used by senior managers to justify their salaries. They carefully craft a business case to demonstrate how they deliver on shareholder value. Indeed our government ministers and senior public servants have also used ethical egoism to justify their own bloated salaries. Zealously protecting freedom to manage as they see fit, they argue that an enterprise culture, freed from all but the most minimal of constraints, best ensures equality. But it’s an equality balanced in favour of the personal enrichment of an elite.

Ethical egoism was starkly illustrated in AIB’s corporate behaviour, which in the past two years saw its senior managers pay themselves close to €100m in bonuses.

Long imbedded in its organisational culture is a managerial sub-culture, a tribe whose members are self-promoted upwards to where the real gravy was at.

All large organisations have such sub-cultures. And the most influential are found at senior and middle management level. Self-serving and self-perpetuating this group knows how to manipulate organisational resources to protect their status and power. They are well able to loot companies to pay themselves well and use shareholder value creation to argue for ever higher salaries and bonus systems.

Their performance management systems favour those who buy into their vision and ambition. Does this have anything to do with running good banks well? The answer is very little. HR performance reward concepts are frequently manipulated with HR management willing participants in ramping up salaries and bonuses.

Bank directors have been rightly criticised for failing to exercise control. But in truth, control was exercised by powerful executive management teams who were free to act within policy boundaries established by their boards. There are no prizes for guessing who writes up these policies. While boards establish senior employee’s remuneration packages, what happens beneath that level is what matters most.

Senior managers define performance, pay policy and strategies. What gets measured gets managed and what gets managed gets rewarded. The problem in banking is this drove out wanted behaviours such as prudent safe lending. Salaries and bonuses were linked to performance concepts such cross selling and lifetime customer profitability. This bonus culture had a damaging effect – it broke the traditional boundary between prudent banker and customer. Bankers behaved as agents for their customers to extract value from the bank itself.

Using external salary reviews, senior managers engineered pay reviews benchmarked to how others elsewhere were being paid. Aided by specialist external remuneration experts, they used external validation to argue for ever higher salaries and bonuses. The bonused performance system became rooted in the way things were done. Banks were blind sided to risks, as their managers were hooked on the possibility of doubling, trebling and quadrupling their salaries through performance bonuses. No one questioned the effect this would have on banks internal control mechanisms, as heavily bonused high fliers ignored time honoured and tested lending policies.

It isn’t surprising then that AIB did not defend itself in the High Court. The bonus payment action taken by its employee was put through on the nod. Was this a case of a contract that had to be honoured or was it more a case of senior management deciding to ensure bonuses were legally copper fastened from challenge? Is it a case of senior managers manipulating organisational resources to achieve their own means?

Finance Minister Lenihan’s rush into the Dail stable waving a “90% future bonus tax” shovel was either another episode of being caught asleep on the job or worse a cynical attempt to kick over the traces. Ever since 2008, senior bankers have run rings around this Government in so many different ways; including the elevation and promotion of looters as their internal senior management tribes looked out for themselves.

Many honourable, hard working AIB employees were horrified to read of how once again their senior management sub-culture had gilded its cage in defiance of proper ethical and moral conduct. AIB’s corporate response fell far short of the mark in trying to draw a line in the sand between the past and the future. It ranks as a prime example of an organisational injustice as a small in-group, many of whom were responsible for the ruination of their bank and the economy, are paid a bonus while other employees are worried sick about whether or not they will have a job this time next year.

A version of this article appeared in the Irish Examiner, Business Edition Monday 13th Dec 2010